Everyone was aware of the challenges that our economy faced before the budget was announced. The expectation was that the budget is likely to signal a positive policy shift towards a more business-friendly environment that would be conducive towards achieving wider prosperity. To be fair to the government, it took a lot of small steps in the right direction in its recent budget.
But the budget made a catastrophic blunder by the imposition of the surcharge on the rich. When it became apparent that the surcharge would also apply to trusts, that’s when things started to go south and then came a statement that the surcharge would be applicable on FPIs registered as trusts.
It is appalling that the Finance Ministry was not aware of the consequences of the decisions that were being taken by them during the budget process. Economic policymaking is not about trial and error and it requires one to meticulously understand and appreciate the complex economic structure. These policy blunders will not have a huge impact on whether India achieves a 5 trillion-dollar economy by 2024 or 2025 or not but they will curtail our growth potential which far succeeds the 5 trillion-dollar target that has been set at present.
The problem is not just with this decision but with the genuine belief within the Ministry on the need to tax the rich more and this misguided morality is likely to cause migration of high skilled workers and of high skilled jobs to countries such as Singapore etc which are much more tax-friendly. A consequence of this is that India would lose out on even the pre-surcharge tax rates.
Moreover, in an earlier joint article with Dr Surjit Bhalla, we showed the Laffer’s curve for corporate tax rates and tax revenue as we argued how India’s direct tax rates are too high (You can read the article by clicking here). Therefore, what was expected from the government was tax reforms and not a reversal to the Indira Gandhi era of high tax rates and low compliance. From the point of view of compliance, complex taxation structure combined with high rates is a disaster as it incentivises people to conceal their income. For a government that has focussed on improving tax compliance, such moves just seem to reverse the fruits of their previous hard work.
But forget about taxes for a second and let’s just look at this year’s economic survey which argued for a revival of private investments and to rekindle animal spirits. Since the budget, we’ve seen repeated measures that have only worsened investor sentiment, and this is visible as FPIs have started to pull out their money from India. At a time when the global supply chains are shifting, rather than improving domestic policies to facilitate their shift to India we’re making them worse.
The economic survey highlighted the issue of small firm size in India compared to the global average and similar countries. Indeed, the issue of small firm size has been discussed in great detail and a major reason behind this has been our wonky labour policies. But the UPA government made a misadventure owing to their socialist tendencies when they imposed Corporate Social Responsibility norms in the Companies Act.
Across the globe, there are discussions regarding CSR norms and their implications for social responsibility, governments, public policy and society in general. There are many arguments for and against CSR norms and most of these arguments are valid. But, let’s keep two things in mind. First, these debates are happening in countries which have a per capita income of at least 10 times that of India and therefore, they’re at an advanced stage of development compared to India. Secondly, the average firm size in these countries is much larger than that in India and therefore, by adding an additional burden of CSR on our companies we divert critical resources that would have otherwise been invested into business operations or distributed as dividends by the company.
The impact of these CSR norms on development objectives, companies, their growth and their size is an issue that needs to be adequately explored but one has to question the rationale behind the imposition of CSR norms on companies that are already paying one of the highest corporate tax rates in the world.
The recent amendments made by the Hon’ble Finance Minister to the company’s act has only reignited the debate on CSR provisions under the act. One must question the move as companies are already paying a corporate income tax, they must pay an additional dividend distribution tax and individuals have to pay an additional 10 per cent the moment their dividend income exceeds 10 lakh rupees. The same income is tax thrice and this happens perhaps only in India.
Despite this, if the government mandates companies which should be guided by the motivation of profits to undertake social responsibility then we should question the efficacy of public expenditure. More so when public resources are being utilized to keep PSUs alive that should have long been closed or downsized, one completely understands why people are outraged at such decisions.
At a time when we want to upscale our firms, boost private investment, promote entrepreneurship and attract foreign firms we should be having business-friendly policies instead of the Nehru-Indira style socialist policies. We tried the socialist policies and it only gave us scarcity, widespread poverty and a sluggish growth rate.
There’s a lot of good things that are happening on the development front but they’re all likely to succeed only when there’s economic growth and therefore, the government should consider a departure from the wonky socialist policies of the past.
Karan Bhasin is a political economist by training and has diversified research interests in the field of economics. He tweets @karanbhasin95.